第18章

Thus，foreveryfivepoundsingoldwhichleavethebanktreasury，afive-poundnotereturnstotheissuedepartmentandisdestroyed；foreveryfivesovereignsgoingintothetreasuryanewfive-poundnotecomesintocirculation。Inthismanner，Overstone’sidealpapercirculation，whichstrictlyfollowsthelawsofmetalliccirculation，iscarriedoutinpractice，andbythismeans，accordingtotheadvocatesoftheCurrencyTheory，crisesaremadeimpossibleforalltime。

ButinrealitytheseparationoftheBankintotwoindependentdepartmentsdepriveditsmanagementofthepossibilityoffreelyutilisingitsentireavailablemeansatcriticaltimes，sothatsituationscouldariseinwhichthebankingdepartmentmightbeonthevergeofbankruptcywhiletheissuedepartmentstillhadintactseveralmillionsingoldand，inaddition，itsentire14millioninsecurities。Andthiscouldtakeplacesomuchmoreeasilysincethereisaperiodinalmosteverycrisiswhenheavyexportsofgoldtakeplacewhichmustbecoveredinthemainbythemetalreserveofthebank。Butforeveryfivepoundsingoldwhichthengoabroad，thedomesticcirculationisdeprivedofafive-poundnote，sothatthequantityofcirculatingmediumisreducedpreciselyatatimewhenthelargestquantityismostneeded。TheBankActof1844thusdirectlyinducestheentirecommercialworldforthwithtohoardareservefundofbank-notesattheoutbreakofacrisis；inotherwords，toaccelerateandintensifythecrisis。Bysuchartificialintensificationofdemandformoneyaccommodation，thatis，formeansofpaymentatthedecisivemoment，andthesimultaneousrestrictionofthesupplytheBankActdrivestherateofinteresttoahithertounknownheightduringacrisis。Hence，insteadofeliminatingcrises，theAct，onthecontrary，intensifiesthemtoapointwhereeithertheentireindustrialworldmustgotopieces，orelsetheBankAct。BothonOctober25，1847，andonNovember12，1857，thecrisisreachedsuchapoint；thegovernmentthenliftedtherestrictionfortheBankinissuingnotesbysuspendingtheActof1844，andthissufficedinbothcasestoovercomethecrisis。

In1847，theassurancethatbank-noteswouldagainbeissuedforfirst-classsecuritiessufficedtobringtolightthe£；4to£；5millionofhoardednotesandputthembackintocirculation；in1857，theissueofnotesexceedingthelegalamountreachedalmostonemillion，butthislastedonlyforaveryshorttime。

Itshouldalsobementionedthatthe1844legislationstillshowstracesrecallingthefirsttwentyyearsofthe19thcentury，theperiodwhenspeciepaymentsweresuspendedandnotesdevaluated。Thefearthatnotesmaylosetheircreditisstillplainlyinevidence。Butthisfearisquitegroundless，sinceevenin1825theissueofadiscoveredoldsupplyofone-poundnotes，whichhadbeentakenoutofcirculation，brokethecrisisandprovedtherebythatthecreditofthenotesremainedunshakenevenintimesofthemostgeneralanddeepestmistrust。Andthisisquiteunderstandable；for，afterall，theentirenationbacksupthesesymbolsofvaluewithitscredit——

F。E。]

LetusnowturntoafewcommentsontheeffectoftheBankAct。JohnStuartMillbelievesthattheBankActof1844[IntheGerman1894editionthisreads:1847——Ed]keptdownover-speculation。HappilythissagespokeonJune12，1857。Fourmonthslaterthecrisisbrokeout。Heliterallycongratulatedthe”bankdirectorsandthecommercialpublicgenerally”

onthefactthatthey”understandmuchbetterthantheydidthenatureofacommercialcrisis，andtheextrememischiefwhichtheydobothtothemselvesandtothepublicbyupholdingover-speculation。”(B。C。1857，No。2031。)

ThesagaciousMr。Millthinksthatifone-poundnotesareissued”asadvancestomanufacturersandothers，whopaywages……thenotesmaygetintothehandsofotherswhoexpendthemforconsumption，andinthatcasethenotesdoconstituteinthemselvesademandforcommoditiesandmayforsometimetendtopromoteariseofprices”[2066]。DoesMr。Millassume，then，thatmanufacturerswillpayhigherwagesbecausetheypaytheminpaperinsteadofgold？Ordoeshebelievethatifamanufacturerreceiveshisloanin£；100notesandexchangesthemforgold，thesewageswouldconstitutelessdemandthanifpaidimmediatelyinone-poundnotes？Anddoeshenotknowthat，forinstance，incertainminingdistrictswageswerepaidinthenotesoflocalbanks，sothatseverallabourerstogetherreceivedonefive-poundnote？Doesthisincreasetheirdemand？Orwillbankersadvancemoneytomanufacturersmoreeasilyandinlargerquantitiesinsmallnotesthaninlargeones？

[ThissingularfearwhichMillhasforone-poundnoteswouldbeinexplicableifhiswholeworkonpoliticaleconomydidnotrevealaneclecticismwhichshowsnohesitationinthefaceofanycontradiction。Ontheonehand，heagreesonmanypointswithTookeasopposedtoOverstone；ontheother，bebelievesthatcommodity-pricesaredeterminedbythequantityofavailablemoney。Heisthusbynomeansconvincedthat，allotherconditionsbeingequal，asovereignwillfinditswayintothecoffersoftheBankforeveryone-poundnoteissued。Hefearsthatthequantityofcirculatingmediumcouldbeincreasedandtherebydevaluated，thatis，commodity-pricesmightrise。Thisandnothingmoreisconcealedbehindtheabove-mentionedapprehension——

F。E。)

TookeexpressesthefollowingviewsbeforetheC。D。1848/57concerningthedivisionoftheBankintotwodepartmentsandtheexcessiveprecautionstakentosafeguardthecashingofnotes:

Thegreaterfluctuationsoftheinterestratein1847，ascomparedwith1837and1839，areduesolelytotheseparationoftheBankintotwodepartments(3010)——Thesafetyofbank-noteswasaffectedneitherin1825norin1837and1839(3015)——Thedemandforgoldin1825wasaimedonlyatfillingthevacuumcreatedbythecompletediscreditoftheone-poundnotesofcountrybanks；thisvacuumcouldbefilledonlybygold，untilsuchtimeastheBankofEnglandalsoissuedone-poundnotes(3022)——InNovemberandDecember1825nottheslightestdemandexistedforgoldforexportpurposes(3023)。”Inpointofdiscreditathomeaswellasabroad，afailureinpayingthedividendsandthedepositswouldbeoffargreaterconsequencethanthesuspendingofthepaymentofthebank-notes(3028)。””3035。Wouldyounotsaythatanycircumstance，whichhadtheeffectofultimatelyendangeringtheconvertibilityofthenote，wouldbeonelikelytoaddseriousdifficultyinamomentofcommercialpressure？——

Notatall。””Inthecourseof1847……anincreasedissuefromthecirculatingdepartmentmighthavecontributedtoreplenishthecoffersoftheBank，asitdidin1825”(3058)。

BeforetheCommitteeonB。A。1857，Newmarchtestifies:”1357。Thefirstmischievouseffect……ofthatseparationofdepartments(oftheBank)and……

anecessaryconsequencefromthecuttingintwoofthereserveofbullionhasbeenthatthebankingbusinessoftheBankofEngland，thatistosay，thewholeofthatpartoftheoperationoftheBankofEnglandwhichbringsitmoreimmediatelyintocontactwiththecommerceofthecountry，hasbeencarriedonuponamoietyonlyofitsformeramountsofreserve。Outofthatdivisionofthereservehasarisen，therefore，thisstateofthings，thatwheneverthereserveofthebankingdepartmenthasbeendiminished，eventoasmallextent，ithasrenderednecessaryanactionbytheBankuponitsrateofdiscount。Thatdiminishedreserve，therefore，hasproducedafrequentsuccessionofchangesandjerksintherateofdiscount。”——”1358。Thealterationssince1844”[untilJune1857]”havebeensome60

innumber，whereasthealterationspriorto1844inthesamespaceoftimecertainlydidnotamounttoadozen。”

OfspecialinterestisthetestimonyofPalmer，aDirectoroftheBankofEnglandsince1811andforawhileitsGovernor，beforetheLords’CommitteeonC。D。1848/57:”828。InDecember1825，therewasabout£；1，100，000ofbullionremainingintheBank。Atthatperioditmustundoubtedlyhavefailedintoto，ifthisActhadbeeninexistence[meaningtheActof1844]。

TheissueinDecember，Ithink，was5or6millionsofnotesinaweek，whichrelievedthepanicthatexistedatthatperiod。””825。Thefirstperiod[sinceJuly1，1825]whenthepresentActwouldhavefailed，iftheBankhadattemptedtocarryoutthetransactionsthenundertaken，wasonthe28thofFebruary1837；atthatperiodtherewere£；3，900，000to£；4，000，000ofbullioninthepossessionoftheBank，andthentheBankwouldhavebeenleftwith£；650，000onlyinthereserve。Anotherperiodisintheyear1839，whichcontinuedfromthe9thofJulytothe5thofDecember。”——”826。Whatwastheamountofthereserveinthatcase？——Thereservewasminusaltogether£；200，000

uponthe5thofSeptember。Onthe5thofNovemberitrosetoaboutamillionoramillionandahalf。”——”830。TheActof1844wouldhavepreventedtheBankgivingassistancetotheAmericantradein1837。”——”831。TherewerethreeoftheprincipalAmericanhousesthatfailed……AlmosteveryhouseconnectedwithAmericawasinastateofdiscredit，andunlesstheBankhadcomeforwardatthatperiod，Idonotbelievethattherewouldhavebeenmorethanoneortwohousesthatcouldhavesustainedthemselves。”——”836。Thepressurein1837isnottobecomparedwiththatof1847。

ThepressureintheformeryearwaschieflyconfinedtotheAmericantrade。”——

838。(EarlyinJune1837themanagementoftheBankdiscussedthequestionofovercomingthepressure。)”Somegentlemenadvocatedtheopinion……thatthecorrectprinciplewastoraisetherateofinterest，bywhichthepriceofcommoditieswouldbelowered；inshort，tomakemoneydearandcommoditiescheap，bywhichtheforeignpaymentwouldbeaccomplished。”——”906。TheestablishmentofanartificiallimitationofthepowersoftheBankundertheActof1844，insteadoftheancientandnaturallimitationoftheBank’spowers，namely，theactualamountofitsspecie，tendstocreateartificialdifficulty，andthereforeanoperationuponthepricesofmerchandisethatwouldhavebeenunnecessarybutfortheprovisionsoftheAct。”——”968。

Youcannot，bytheworkingoftheActof1844，materiallyreducethebullion，underordinarycircumstances，belowninemillionandahalf。Itwouldthencauseapressureuponpricesandcreditwhichwouldoccasionsuchanadvanceintheexchangewithforeigncountriesas10increasetheimportofbullion，andtothatextentaddtotheamountintheissuedepartment。”——”996。

Underthelimitationthatyou[theBank]arenowsubjectto，youhavenotthecommandofsilvertoanextentthatyourequireatatimewhensilverwouldberequiredforanactionupontheforeignexchanges。”——”999。WhatwastheobjectoftheregulationrestrictingtheBankastotheamountofsilvertoone-fifth？——Icannotanswerthatquestion。”

Thepurposewastomakemoneydear；asidefromtheCurrencyTheory，theseparationofthetwobankdepartmentsandtherequirementforScottishandIrishbankstoholdgoldinreserveforbackingnotesissuedbeyondacertainamounthadthesamepurpose。Thisbroughtaboutadecentralisationofthenationalmetalreserve，whichdecreaseditscapabilityofcorrectingunfavourableexchangerates。Allthefollowingstipulationsaimtoraisetheinterestrate:thattheBankofEnglandshallnotissuenotesexceeding14millionexceptagainstgoldreserve；thatthebankingdepartmentshallbeadministeredasanordinarybank，forcingtheinterestratedownwhenmoneyisplentifulanddrivingit，upwhenmoneyisscarce；limitingthesilverreserve，theprincipalmeansofrectifyingtheratesofexchangewiththecontinentandAsia；theregulationsconcerningtheScottishandIrishbanks，whichneverrequiregoldforexportbutmustnowkeepitunderthepretenceofensuringanactuallyillusoryconvertibilityoftheirnotes。

ThefactisthattheActof1844causedarunontheScottishbanksforgoldin1857forthefirsttime。Nordoesthenewbanklegislationmakeanydistinctionbetweenadrainofgoldabroadorfordomesticpurposes，althoughitgoeswithoutsayingthattheireffectsarequitedifferent。

Hencethecontinuallargefluctuationsinthemarketrateofinterest。

Withreferencetosilver，Palmersaysontwoseparateoccasions，992and994，thattheBankcanbuysilverfornotesonlywhentherateofexchangeisfavourableforEngland，i。e。，silverissuperfluous；for:”1003。

Theonlyobjectinholdingaconsiderableamountofbullioninsilveristofacilitatemakingtheforeignpaymentsolongastheexchangesareagainstthecountry。”——”1004。Silveris……acommoditywhich，beingmoneyineveryotherpartoftheworld，isthereforethemostdirectcommodityforthepurpose”[paymentsabroad]。”TheUnitedStateslatterlyhavetakengoldalone。”

Inhisopinion，theBankdidnothavetoraisetheinterestrateaboveitsoldlevelof5%intimesofstringency，solongasunfavourableexchangeratesdonotdraingoldtoforeigncountries。WereitnotfortheActof1844，theBankwouldbeabletodiscountallfirst-classbillspresentedtoitwithoutdifficulty。[1018-20。]ButundertheActof1844andinthestateinwhichtheBankfounditselfinOctober1847，”therewasnorateofinterestwhichtheBankcouldhavechargedtohousesofcredit，whichtheywouldnothavebeenwillingtopaytocarryontheirpayments”[1022]。

AndthishighinterestratewaspreciselythepurposeoftheAct。”1029……GreatdistinctionwhichIwishtodrawbetweentheactionoftherateofinterestuponaforeigndemand[forpreciousmetal]andanadvanceintheratefortheobjectofcheckingademandupontheBankduringaperiodofinternaldiscredit。”——”4023。PreviouslytotheActof4844……

whentheexchangeswereinfavourofthecountry，andpositivepanicandalarmexistedthroughthecountry，therewasnolimitputupontheissue，bywhichalonethatstateofdistresscouldberelieved。”

Sospeaksamanwhohasoccupiedapostfor39yearsintheadministrationoftheBankofEngland。Letusnowlistentoaprivatebanker，Twells，anassociateofSpooner，Attwood&；Co。since1801。HeisaloneamongthewitnessesbeforetheB。C。4857whoprovidesuswithaninsightintothecountry’sactualstateofaffairsandwhoseesthecrisisapproaching。

Inotherrespects，however，heisasortoflittle-shillingmanfromBirmingham，likehisassociates，theAttwoodbrothers，whoarethefoundersofthisschool。(SeeZurKritikderpol。Oek。，S。59。)Hetestifies:”4488。

HowdoyouthinkthattheActof1844hasoperated？——IfIweretoansweryouasabanker，Ishouldsaythatithasoperatedexceedinglywell，forithasaffordedarichharvesttobankersand[money-]capitalistsofallkinds。Butithasoperatedverybadlytothehonestindustrioustrades-manwhorequiressteadinessintherateofdiscount，thathemaybeenabledtomakehisarrangementswithconfidence……Ithasmademoney-lendingamostprofitablepursuit。”——”4489。It[theBankAct，]enablestheLondonjoint-stockbankstoreturnfrom20to22%totheirproprietors？——Theotherdayoneofthemwaspaying18%andIthinkanother20%；theyoughttosupporttheActof1844verystrongly。”——”4490。Thelittletradesmenandrespectablemerchants，whohavenotalargecapital……itpinchesthemverymuchindeed……TheonlymeansthatIhaveofknowingisthatIobservesuchanamazingquantityoftheiracceptancesunpaid。Theyarealwayssmall，perhapsrangingfrom£；20to£；400，agreatmanyofthemareunpaidandgobackunpaidtoallpartsofthecountry，whichisalwaysanindicationofsufferingamongst……littleshopkeepers。”——4494。Hedeclaresthatbusinessisnotprofitablenow。Thefollowingremarksofhisareimportantbecausetheyshowthathesawthelatentexistenceofthecrisiswhennoneoftheothershadevenaninklingofit。”4494。ThingskeeptheirpricesinMincingLane，butwesellnothing，wecannotselluponanyterms；wekeepthenominalprice。”——4495。Herelatesthefollowingcase:AFrenchmansendsabrokerinMincingLanecommoditiesfor£；3，000tobesoldatacertainprice。Thebrokercannotobtaintherequestedprice，andtheFrenchmancannotsellbelowthisprice。Thecommoditiesremainunsold，buttheFrenchmanneedsmoney。

Thebrokerthereforemakeshimanadvanceof£；1，000andhastheFrenchmandrawabillofexchangeof£；1，000forthreemonthsonthebrokeragainsthiscommoditiesassecurity。Attheendofthethreemonthsthebillbecomesdue，butthecommoditiesstillremainunsold。Thebrokermustthenpaythebill，andalthoughhepossessessecurityfor£；3，000，hecannotconvertitintocashandasaresultfacesdifficulties。Inthismanner，onepersondragsanotherdownwithhim——”4496。Withregardtothelargeexports……wherethereisadepressedstateoftradeathome，itnecessarilyforceslargeexportation。”——”4497。Doyouthinkthatthehomeconsumptionhasbeendiminished？——Verymuchindeed……immensely……theshopkeepersarethebestauthorities。”——”4498。Stilltheimportationsareverylarge；doesnotthatindicatealargeconsumption？——Itdoes，ifyoucansell；butmanyofthewarehousesarefullofthesethings；

inthisveryinstancewhichIhavebeenrelating，thereis£；3，000

worthimported，whichcannotbesold。””4514。Whenmoneyisdear，wouldyousaythatcapitalwouldbecheap？——

Yes。”Thisman，then，isbynomeansofOverstone’sopinionthatahighrateofinterestisthesameasdearcapital。

Thefollowingshowshowbusinessisnowconducted:”4616。Othersaregoingtoaverygreatextent，carryingonaprodigioustradeinexportsandimports，toanextentfarbeyondwhattheircapitaljustifiesthemindoing；therecanbenodoubtofallofthat。Thesemenmaysucceed；

theymaybysomeluckyventuregetlargefortunes，andputthemselvesright。

Thatisverymuchthesysteminwhichagreatdealoftradeisnowcarriedon。Personswillconsenttolose20，30，and40percentuponashipment；

thenextventuremaybringitbacktothem。Iftheyfailinoneafteranother，thentheyarebrokenup；andthatisjustthecasewhichwehaveoftenseenrecently；mercantilehouseshavebrokenup，withoutoneshillingofpropertybeingleft。””4791。Thelowrateofinterest[duringthelasttenyears]operatesagainstbankers，itistrue，butIshouldhaveverygreatdifficultyinexplainingtoyou，unlessIcouldshowyouthebooks，howmuchhighertheprofits[hisown]arenowthantheyusedtobeformerly。Wheninterestislow，fromexcessiveissues，wehavelargedeposits；wheninterestishigh，wegettheadvantageinthatway。”——”4794。Whenmoneyisatamoderaterate，wehavemoredemandforit；welendmore；itoperatesinthatway[forus，thebankers]。Whenitgetshigher，wegetmorethanafairproportionforit；wegetmorethanweoughttodo。”

WehaveseenthatthecreditofBankofEnglandnotesisconsideredbeyondquestionbyallexperts。Nevertheless，theBankActcompletelytiesupninetotenmillioningoldfortheconvertibilityofthesenotes。Thesacrednessandinviolabilityofthisreserveistherebycarriedmuchfartherthanamonghoardersofoldentimes。Mr。Brown(Liverpool)testifies，C。

D。1847/57:”2311:Thismoney[themetalreserveintheissuedepartment]

mightaswellhavebeenthrownintotheseafromanyusethatitwasofatthattime，therebeingnopowertoemployanyofitwithoutviolatingtheActofParliament。”

ThebuildingcontractorE。Capps，alreadycitedearlier，whosetestimonyisalsousedtoillustratethemodernbuildingsysteminLondon(Vol。II，Ch。XII)，sumsuphisopinionoftheBankActof1844asfollows[B。A。

1857]:”5508。Thenuponthewhole……youthinkthatthepresentsystem[ofbanklegislation]isasomewhatadroitschemeforbringingtheprofitsofindustryperiodicallyintotheusurer’sbag？——Ithinkso。Iknowthatithasoperatedsointhebuildingtrade。”

Asmentionedbefore，theScottishbankswereforcedbytheBankActof1845intoasystemresemblingthatoftheEnglish。Theywereobligedtoholdgoldinreservefortheirnoteissuebeyondthelimitfixedforeachbank。TheeffectofthismaybeseenfromthefollowingtestimonybeforetheC。D。1848/57。

Kennedy，DirectorofaScottishbank:”3375。WasthereanythingthatyoucancallacirculationofgoldinScotlandpreviouslytothepassingoftheActof1845？——Nonewhatever。”——”3376。Hastherebeenanyadditionalcirculationofgoldsince？——Nonewhatever；thepeopledislikegold。”——

3450。Thesumofabout£；900，000ingold，whichtheScottishbanksarecompelledtokeepsince1845，canonlybeinjuriousinhisopinionand”absorbsunprofitablysomuchofthecapitalofScotland。”

Furthermore，Anderson，DirectoroftheUnionBankofScotland:”3588。

TheonlypressureupontheBankofEnglandbythebanksinScotlandforgoldwasforforeignexchanges？——Itwas；andthatisnottoberelievedbyholdinggoldinEdinburgh。”——”3590。HavingthesameamountofsecuritiesintheBankofEngland”[orintheprivatebanksofEngland]”wehavethesamepowerthatwehadbeforeofmakingadrainupontheBankofEngland。”

Finally，wequoteanarticlefromtheEconomist(Wilson):”TheScotchbankskeepunemployedamountsofcashwiththeirLondonagents；

thesekeepthemintheBankofEngland。ThisgivestotheScotchbanks，withinthelimitsoftheseamounts，commandoverthemetalreserveoftheBank，andhereitisalwaysintheplacewhereitisneeded，whenforeignpaymentsaretobemade。”——ThissystemwasdisturbedbytheActof1845:

InconsequenceoftheActof1845forScotland”oflatealargedrainofthecoinoftheBankhastakenplace，tosupplyamerecontingentdemandinScotland，whichmayneveroccur……SincethatperiodtherehasbeenalargesumuniformlylockedupinScotland，andanotherconsiderablesumconstantlytravellingbackandforwardbetweenLondonandScotland。IfaperiodarriveswhenaScotchbankexpectsanincreaseddemandforitsnotes，aboxofgoldisbroughtdownfromLondon；whenthisperiodispast，thesamebox，generallyunopened，issentbacktoLondon。”(Economist，October23，1847[pp。1214-1215]。)

[AndwhatdoesthefatheroftheBankAct，bankerSamuelJonesLoyd，aliasLordOverstone，saytoallthis？

Alreadyin1848herepeatedbeforetheLords’CommitteeonCommercialDistressthat”pressure，andahighrateofinterestcausedbythewantofsufficientcapital，cannotberelievedbyanextraissueofbank-notes”

(1514)，inspiteofthefactthatthemereauthoritytoincreasethenoteissue，givenbytheGovernment’sLetterofOctober25，1847，hadsufficedtotaketheedgeoffthecrisis。

Heholdstotheviewthat”thehighrateofinterestandthedepressionofthemanufacturinginterestswasthenecessaryresultofthediminutionofthematerialcapitalapplicabletomanufacturingandtradingpurposes”(1604)。Andyetthedepressedconditionofthemanufacturingindustryhadformonthsconsistedinmaterialcommodity-capitalfillingthewarehousestooverflowingandbeingactuallyunsaleable；sothatforpreciselythisreason，materialproductivecapitallaywhollyorpartlyidle，inordernottoproducestillmoreunsaleablecommodity-capital。

AndbeforetheBankCommitteeof1857hesays:”BystrictandpromptadherencetotheprinciplesoftheActof1844，everythinghaspassedoffwithregularityandease，themonetarysystemissafeandunshaken，theprosperityofthecountryisundisputed，thepublicconfidenceinthewisdomoftheActof1844isdailygainingstrength，andiftheCommitteewishforfurtherpracticalillustrationofthesoundnessoftheprinciplesonwhichitrests，orofthebeneficialresultswhichithasensured，thetrueandsufficientanswertotheCommitteeis，lookaroundyou，lookatthepresentstateofthetradeofthiscountry，……lookatthecontentmentofthepeople，lookatthewealthandprosperitywhichpervadeseveryclassofthecommunity，andthenhavingdoneso，theCommitteemaybefairlycalledupontodecidewhethertheywillinterferewiththecontinuanceofanActunderwhichthoseresultshavebeendeveloped。”(B。C。1857，No。4189。)

TothissongofpraisebyOverstonebeforetheCommitteeonJuly14，theantistrophewasgivenonNovember12ofthesameyearintheshapeofalettertotheBank’smanagement，inwhichthegovernmentsuspendedthemiracle-workinglawof1844tosavewhatcouldstillbesaved——F。

E。]

Capital，Vol。3，Chapter35KarlMarxCAPITALVol。III

THEPROCESSOF

CAPITALISTPRODUCTIONASAWHOLEPartV

DIVISIONOFPROFITINTOINTERESTANDPROFIT

OFENTERPRISE。

INTEREST-BEARINGCAPITALCHAPTER35

PreciousMetalandRateofExchangeI。MOVEMENTOFTHEGOLDRESERVE

itshouldbenotedinregardtotheaccumulationofnotesintimesofstringency，thatitisarepetitionofthehoardingofpreciousmetalasusedtotakeplaceintroubledtimesinthemostprimitiveconditionsofsociety。TheActof1844isinterestinginitsoperationbecauseitseekstotransformallpreciousmetalexistinginthecountryintoacirculatingmedium；itseekstoequateadrainofgoldwithacontractionofthecirculatingmediumandareturnflowofgoldwithanexpansionofthecirculatingmedium。

Asaresult，theexperimentprovedthecontrarytobethecase。Withasingleexception，whichweshallmentionshortly，thequantityofcirculatingnotesoftheBankofEnglandhasnever，since1844，reachedthemaximumwhichitwasauthorisedtoissue。Thecrisisof1857provedontheotherhandthatthismaximumdoesnotsufficeundercertaincircumstances。FromNovember13to30，1857，adailyaverageof£；488，830abovethismaximumwascirculating(B。A。1858，p。XI)。Thelegalmaximumwasatthattime£；14，475，000，plustheamountofmetalreserveinthevaultsoftheBank。

Concerningtheoutflowandinflowofpreciousmetal，thefollowingistobenoted:

First，adistinctionshouldbemadebetweenthebackandforthmovementofmetalwithinaregionwhichdoesnotproduceanygoldandsilver，ontheonehand，and，ontheother，theflowofgoldandsilverfromtheirsourcesofproductiontovariousothercountriesandthedistributionofthisadditionalmetalamongthem。

BeforethegoldminesofRussia，CaliforniaandAustraliamadetheirinfluencefelt，thesupplysincethebeginningofthe19thcenturysufficedonlyforthereplacementofworn-outcoins，forgeneraluseinarticlesofluxury，andfortheexportofsilvertoAsia。

However，inthefirstplace，silverexportstoAsiahavesinceincreasedextraordinarily，owingtotheAsiatictradeofAmericaandEurope。ThesilverexportedfromEuropewaslargelyreplacedbytheadditionalsupplyofgold。Secondly，aportionofthenewlyimportedgoldwasabsorbedbyinternalmoneycirculation。Itisestimatedthatupto1857about30millioningoldwereaddedtoEngland’sinternalcirculation。[14]Furthermore，theaveragelevelofmetalreservesinallthecentralbanksofEuropeandAmericaincreasedsince1844。Theexpansionofdomesticmoneycirculationresultedatthesametimeinbankreservesgrowingmorerapidlyintheperiodofstagnationfollowinguponthepanic，becauseofthelargerquantityofgoldcoinsthrustoutofdomesticcirculationandimmobilised。

Finally，theconsumptionofpreciousmetalforluxuryarticlesincreasedsincethediscoveryofnewgolddepositsasaconsequenceoftheincreasedwealth。

Secondly，preciousmetalflowsbackandforthbetweencountrieswhichdonotproduceanygoldorsilver，thesamecountrycontinuallyimporting，andalsoexporting。Itisonlythepreponderanceofthismovementinoneoranotherdirectionwhich，inthefinalanalysis，determineswhetheradrainoranaugmentationhastakenplace，sincethemereoscillationsandfrequentlyparallelmovementslargelyneutraliseoneanother。Butforthisreason，insofarastheresultisconcerned，thecontinuityand，inthemain，theparallelcourseofbothmovementsisoverlooked。Agreaterimportoragreaterexportofpreciousmetalisalwaysinterpretedtobesolelytheeffectandexpressionoftherelationbetweentheimportsandexportsofcommodities，whereasitissimultaneouslyindicativeoftherelationbetweenexportsandimportsofpreciousmetalitself，quiteindependentofcommoditytrade。

Thirdly，thepreponderanceofimportsoverexports，andviceversa，ismeasuredonthewholebytheincreaseordecreaseinmetalreservesofthecentralbanks。Thegreaterorlesserprecisionofthiscriterionnaturallydependsprimarilyonthedegreeofcentralisationofthebankingbusinessingeneral。Foronthisdependstheextentthatpreciousmetalingeneralaccumulatedintheso-callednationalbanksrepresentsthenationalmetalreserve。Butassumingthistobethecase，thecriterionisnotaccuratebecauseanadditionalimportmaybeabsorbedundercertaincircumstancesbydomesticcirculationandthegrowingconsumptionofgoldandsilverinproducingluxuryarticles；furthermore，becausewithoutadditionalimport，awithdrawalofgoldcoinfordomesticcirculationcouldtakeplace，andthusthemetalreservecoulddecreaseevenwithoutasimultaneousincreaseinexports。

Fourthly，anexportofmetalassumestheaspectofadrainwhenthemovementofdecreasecontinuesforalongtime，sothatthedecreaserepresentsatendencyofmovementanddepressesthemetalreserveofthebankconsiderablybelowitsaveragelevel，downtoapproximatelyitsaverageminimum。Thisminimumismoreorlessarbitrarilyfixed，insofarasitisdifferentlydeterminedineveryindividualcasebylegislationconcerningbackingforthecashingofnotes，etc。ConcerningthequantitativelimitswhichsuchadraincanreachinEngland，NewmarchtestifiedbeforetheCommitteeonB。A。1857，EvidenceNo。1494:”Judgingfromexperience，itisveryunlikelythattheeffluxoftreasurearisingfromanyoscillationintheforeigntradewillproceedbeyond£；3，000，000or£；4，000，000。”——

In1847，thelowestgoldreserveleveloftheBankofEngland，occurringonOctober23，showedadecreaseof£；5，198，156ascomparedwiththatofDecember26，1846，andadecreaseof£；6，453，748ascomparedwiththehighestlevelof1846(August29)。

Fifthly，thedeterminationofthemetalreserveoftheso-callednationalbanks，adetermination，however，whichdoesnotbyitselfregulatethemagnitudeofthismetalhoard，foritcangrowsolelybytheparalysisofdomesticandforeigntrade，isthreefold:1)reservefundforinternationalpayments，inotherwords，reservefundofworld-money；2)reservefundforalternatelyexpandingandcontractingdomesticmetalcirculation；3)

reservefundforthepaymentofdepositsandfortheconvertibilityofnotes(thisisconnectedwiththefunctionofthebankandhasnothingtodowiththefunctionsofmoneyassuch)。Thereservefundcan，therefore，alsobeinfluencedbyconditionswhichaffecteveryoneofthesethreefunctions。Thus，asaninternationalfunditcanbeinfluencedbythebalanceofpayments，nomatterbywhatfactorsthelattermaybedeterminedandwhateveritsrelationtothebalanceoftrademaybe。Asareservefundfordomesticmetalcirculationitcanbeinfluencedbythelatter’sexpansionorcontraction。Thethirdfunction——thatofasecurityfund——doesnot，admittedly，determinetheindependentmovementofthemetalreserve，buthasatwo-foldeffect。Ifnotesareissuedwhichreplacemetallicmoney(alsoincludingsilvercoinsincountrieswheresilverisameasureofvalue)indomesticcirculation，thefunctionofthereservefundunder2)dropsaway。Andaportionofthepreciousmetal，whichservedtoperformthisfunction，willforalongtimefinditswayabroad。Inthiscasemetalliccoinsarenotwithdrawnfordomesticcirculation，andthusthetemporaryaugmentationofthemetalreservebyimmobilisingapartofthecirculatingcoinedmetalsimultaneouslyfallsaway。Furthermore，ifaminimummetalreservemustbemaintainedunderallcircumstancesforthepaymentofdepositsandfortheconvertibilityofnotes，thisaffectsinitsownwaytheresultsofadrainorreturnflowofgold；itaffectsthatpartofthereservewhichthebankisobligedtomaintainunderallcircumstances，orthatpartwhichitseekstogetridofasuselessatcertaintimes。Ifthecirculationwerepurelymetallicandthebankingsystemconcentrated，thebankwouldlikewisehavetoconsideritsmetalreserveassecurityforthepaymentofitsdeposits，andadrainofmetalcouldcauseapanicsuchaswaswitnessedinHamburgin1857。

Sixthly，withtheexceptionofperhaps1837，therealcrisisalwaysbrokeoutonlyafterachangeintheratesofexchange，thatis，assoonastheimportofpreciousmetalhadagaingainedpreponderanceoveritsexport。

In1825，therealcrashcameafterthedrainongoldhadceased。In1839，therewasadrainongold，butitdidnotbringaboutacrash。In1847，thedrainongoldceasedinAprilandthecrashcameinOctober。

In1857，thedrainongoldtoforeigncountrieshadceasedinearlyNovember，andthecrashdidnotcomeuntillaterthatsamemonth。

Thisisparticularlyevidentinthecrisisof1847，whenthedrainongoldceasedinAprilaftercausingaslightpreliminarycrisis，andtherealbusinesscrisisdidnotcomeuntilOctober。

ThefollowingtestimonywaspresentedattheSecretCommitteeoftheHouseofLordsonCommercialDistress，1848。Thisevidencewasnotprinteduntil1857(alsocitedasC。D。1848/57)。

EvidenceofTooke:InApril1847，astringencyarose，which，strictlyspeaking，equalledapanic，butwasofrelativelyshortdurationandnotaccompaniedbyanycommercialfailuresofimportance。InOctoberthestringencywasfarmoreintensivethanatanytimeduringApril，analmostunheard-ofnumberofcommercialfailurestakingplace(2996)——InApriltheratesofexchange，particularlywithAmerica，compelledustoexportaconsiderableamountofgoldinpaymentforunusuallylargeimports；onlybyanextremeeffortdidtheBankstopthedrainanddrivetherateshigher(2997)——

InOctobertheratesofexchangefavouredEngland(2998)——ThechangeintheratesofexchangehadbeguninthethirdweekofApril(3000)——

TheyfluctuatedinJulyandAugust；sincethebeginningofAugusttheyalwaysfavouredEngland(3001)——ThedrainongoldinAugustarosefromademandforinternalcirculation[3003]。

J。Morris，GovernoroftheBankofEngland:AlthoughtherateofexchangefavouredEnglandsinceAugust1847，andanimportofgoldhadtakenplaceinconsequence，thebullionreserveoftheBankdecreased。”£；2，200，000

wentoutintothecountryinconsequenceoftheinternaldemand”(137)——

Thisisexplainedontheonehandbyanincreasedemploymentoflabourersinrailwayconstruction，andontheotherbythe”circumstanceofthebankerswishingtoprovidethemselveswithgoldintimesofdistress”(147)。

Palmer，ex-governorandaDirectoroftheBankofEnglandsince1811:”684。DuringthewholeperiodfromthemiddleofApril1847tothedayofwithdrawingtherestrictiveclauseintheActof1844theforeignexchangeswereinfavourofthiscountry。”

Thedrainofbullion，whichcreatedanindependentmoneypanicinApril1847washeretherefore，asalways，butaprecursorofthecrisis，andaturnhadalreadytakenplacebeforeitbrokeout。In1839，aheavydrainofbulliontookplaceforgrain，etc。，whilebusinesswasstronglydepressed，buttherewasnocrisisormoneypanic。

Seventhly，assoonasgeneralcriseshavespentthemselves，goldandsilver——leavingasidetheinflowofnewpreciousmetalfromtheproducingcountries——distributethemselvesoncemoreintheproportionsinwhichtheyexistedinastateofequilibriumasindividualhoardsofthevariouscountries。Otherconditionsbeingequal，therelativemagnitudeofahoardineachcountrywillbedeterminedbytheroleofthatcountryintheworld-market。

Theyflowfromthecountrywhichhadmorethanitsnormalsharetothosewithlessthananormalamount。Thesemovementsofoutgoingandincomingmetalmerelyrestoretheoriginaldistributionamongthevariousnationalreserves。Thisredistribution，however，isbroughtaboutbytheeffectsofvariouscircumstances，whichwillbetakenupinourtreatmentofratesofexchange。Assoonasthenormaldistributionisoncemorerestored-beginningwiththismoment-astageofgrowthsetsinandthenagainadrain。[Thislaststatementapplies，ofcourse，onlytoEngland，asthecentreoftheworldmoney-market——F。E。]

Eighthly，adrainofmetalisgenerallythesymptomofachangeinthestateofforeigntrade，andthischangeinturnisapremonitionthatconditionsareagainapproachingacrisis。[15]

Ninthly，thebalanceofpaymentscanfavourAsiaagainstEuropeandAmerica。[16]

Animportofpreciousmetaltakesplacemainlyduringtwoperiods。Ontheonehand，ittakesplaceinthefirstphaseofalowinterestrate，whichfollowsuponacrisisandreflectsarestrictionofproduction；andtheninthesecondphase，whentheinterestraterises，butbeforeitattainsitsaveragelevel。Thisisthephaseduringwhichreturnscomequickly，commercialcreditisabundant，andthereforethedemandforloancapitaldoesnotgrowinproportiontotheexpansionofproduction。Inbothphases，withloancapitalrelativelyabundant，thesuperfluousadditionofcapitalexistingintheformofgoldandsilver，i。e。，aforminwhichitcanprimarilyserveonlyasloancapital，mustseriouslyaffecttherateofinterestandconcomitantlytheatmosphereofbusinessingeneral。

Ontheotherhand，adrain，acontinuedandheavyexportofpreciousmetal，takesplaceassoonasreturnsnolongerflow，marketsareoverstocked，andanillusoryprosperityismaintainedonlybymeansofcredit；inotherwords，assoonasagreatlyincreaseddemandforloancapitalexistsandtheinterestrate，therefore，hasreachedatleastitsaveragelevel。Undersuchcircumstances，whicharereflectedpreciselyinadrainofpreciousmetal，theeffectofcontinuedwithdrawalofcapital，inaforminwhichitexistsdirectlyasloanablemoney-capital，isconsiderablyintensified。

Thismusthaveadirectinfluenceontheinterestrate。Butinsteadofrestrictingcredittransactions，theriseininterestrateextendsthemandleadstoanover-strainingofalltheirresources。Thisperiod，therefore，precedesthecrash。

Newmarchisasked，B。A。1857:”1520。Butthenthevolumeofbillsincirculationincreaseswiththerateofdiscount？——Itseemstodoso。”——”1522。Inquietordinarytimestheledgeristherealinstrumentofexchange；butwhenanydifficultyarises；when，forexample，undersuchcircumstancesasIhavesuggested，thereisariseinthebank-rateofdiscount……thenthetransactionsnaturallyresolvethemselvesintodrawingbillsofexchange，thosebillsofexchangebeingnotonlymoreconvenientasregardslegalproofofthetransactionwhichhastakenplace，butalsobeingmoreconvenientinordertoeffectpurchaseselsewhere，andbeingpre-eminentlyconvenientasameansofcreditbywhichcapitalcanberaised。”——

Furthermore，assoonassomewhatthreateningconditionsinducethebanktoraiseitsdiscountrate——wherebytheprobabilityexistsatthesametimethatthebankwillcutdowntherunningtimeofthebillstobediscountedbyit-thegeneralapprehensionspreadsthatthiswillriseincrescendo。

Everyone，andaboveallthecreditswindler，willthereforestrivetodiscountthefutureandhaveasmanymeansofcreditaspossibleathiscommandatthegiventime。Thesereasons，then，amounttothis:itisnotthatthemerequantityofimportedorexportedpreciousmetalassuchwhichmakesitsinfluencefelt，butthatitexertsitseffect，firstly，byvirtueofthespecificcharacterofpreciousmetalascapitalinmoney-form，andsecondly，byactinglikeafeatherwhich，whenaddedtotheweightonthescales，sufficestotiptheoscillatingbalancedefinitelytooneside；

itactsbecauseitarisesunderconditionswhenanyadditiondecidesinfavourofoneortheotherside。Withoutthesegrounds，itwouldbequiteinexplicablewhyadrainofgoldamountingto，say，£；5，000，000to£；8，000，000——andthisisthelimitofexperiencetodate——shouldhaveanyappreciableeffect。Thissmalldecreaseorincreaseofcapital，whichseemsinsignificantevencomparedtothe£；70millioningoldwhichcirculateonanaverageinEngland，isreallyanegligiblysmallmagnitudewhencomparedtoproductionofsuchvolumeasthatoftheEnglish。[17]Butitispreciselythedevelopmentofthecreditandbankingsystem，whichtends，ontheonehand，topressallmoney-capitalintotheserviceofproduction(orwhatamountstothesamething，totransformallmoneyincomeintocapital)，andwhich，ontheotherhand，reducesthemetalreservetoaminimuminacertainphaseofthecycle，sothatitcannolongerperformthefunctionsforwhichitisintended——itisthedevelopedcreditandbankingsystemwhichcreatesthisover-sensitivenessofthewholeorganism。

Atlessdevelopedstagesofproduction，thedecreaseorincreaseofthehoardbeloworaboveitsaveragelevelisarelativelyinsignificantmatter。

Similarly，ontheotherhand，evenaveryconsiderabledrainofgoldisrelativelyineffectiveifitdoesnotoccurinthecriticalperiodoftheindustrialcycle。

Inthegivenexplanationwehavenotconsideredcasesinwhichadrainofgoldtakesplaceasaresultofcropfailures，etc。Insuchcasesthelargeandsuddendisturbanceoftheequilibriumofproduction，whichisexpressedbythisdrain，requiresnofurtherexplanationastoitseffect。

Thiseffectisthatmuchgreaterthemoresuchadisturbanceoccursinaperiodwhenproductionisinfullswing。

Wehavealsoomittedfromconsiderationthefunctionofthemetalreserveasasecurityforbank-noteconvertibilityandasthepivotoftheentirecreditsystem。Thecentralbankisthepivotofthecreditsystem。Andthemetalreserve，inturn，isthepivotofthebank。[18]Thechange-overfromthecreditsystemtothemonetarysystemisnecessary，asIhavealreadyshowninVol。I(Ch。III)indiscussingmeansofpayment。

ThatthegreatestsacrificesofrealwealtharenecessarytomaintainthemetallicbasisinacriticalmomenthasbeenadmittedbybothTookeandLoyd-Overstone。Thecontroversyrevolvesmerelyroundaplusoraminus，androundthemoreorlessrationaltreatmentoftheinevitable。[19]Acertainquantityofmetal，insignificantcomparedwiththetotalproduction，isadmittedtobethepivotalpointofthesystem。Hencethesuperbtheoreticaldualism，asidefromtheappallingmanifestationofthischaracteristicthatitpossessesasthepivotalpointduringcrises。Solongasenlightenedeconomytreats”ofcapital”exprofesso，itlooksdownupongoldandsilverwiththegreatestdisdain，consideringthemasthemostindifferentanduselessformofcapital。Butassoonasittreatsofthebankingsystem，everythingisreversed，andgoldandsilverbecomecapitalparexcellence，forwhosepreservationeveryotherformofcapitalandlabouristobesacrificed。Buthowaregoldandsilverdistinguishedfromotherformsofwealth？Notbythemagnitudeoftheirvalue，forthisisdeterminedbythequantityoflabourincorporatedinthem；butbythefactthattheyrepresentindependentincarnations，expressionsofthesocialcharacterofwealth。[Thewealthofsocietyexistsonlyasthewealthofprivateindividuals，whoareitsprivateowners。Itpreservesitssocialcharacteronlyinthattheseindividualsmutuallyexchangequalitativelydifferentuse-valuesforthesatisfactionoftheirwants。Undercapitalistproductiontheycandosoonlybymeansofmoney。Thusthewealthoftheindividualisrealisedassocialwealthonlythroughthemediumofmoney。Itisinmoney，inthisthing，thatthesocialnatureofthiswealthisincarnated——

F。E。]Thissocialexistenceofwealththereforeassumestheaspectofaworldbeyond，ofathing，matter，commodity，alongsideofandexternaltotherealelementsofsocialwealth。Solongasproductionisinastateoffluxthisisforgotten。Credit，likewiseasocialformofwealth，crowdsoutmoneyandusurpsitsplace。Itisfaithinthesocialcharacterofproductionwhichallowsthemoney-formofproductstoassumetheaspectofsomethingthatisonlyevanescentandideal，somethingmerelyimaginative。

Butassoonascreditisshaken——andthisphaseofnecessityalwaysappearsinthemodernindustrialcycle——alltherealwealthistobeactuallyandsuddenlytransformedintomoney，intogoldandsilver——amaddemand，which，however，growsnecessarilyoutofthesystemitself。AndallthegoldandsilverwhichissupposedtosatisfytheseenormousdemandsamountstobutafewmillionsinthevaultsoftheBank。[20]

Amongtheeffectsofthegolddrain，then，thefactthatproductionassocialproductionisnotreallysubjecttosocialcontrol，isstrikinglyemphasisedbytheexistenceofthesocialformofwealthasathingexternaltoit。Thecapitalistsystemofproduction，infact，hasthisfeatureincommonwithformersystemsofproduction，insofarastheyarebasedontradeincommoditiesandprivateexchange。Butonlyinthecapitalistsystemofproductiondoesthisbecomeapparentinthemoststrikingandgrotesqueformofabsurdcontradictionandparadox，because，inthefirstplace，productionfordirectuse-value，forconsumptionbytheproducersthemselves，ismostcompletelyeliminatedunderthecapitalistsystem，sothatwealthexistsonlyasasocialprocessexpressedastheintertwiningofproductionandcirculation；andsecondly，withthedevelopmentofthecreditsystem，capitalistproductioncontinuallystrivestoovercomethemetalbarrier，whichissimultaneouslyamaterialandimaginativebarrierofwealthanditsmovement，butagainandagainitbreaksitsbackonthisbarrier。

Inthecrisis，thedemandismadethatallbillsofexchange，securitiesandcommoditiesshallbesimultaneouslyconvertibleintobankmoney，andallthisbankmoney，inturn，intogold。

II。THERATEOFEXCHANGE

[Therateofexchangeisknowntobethebarometerfortheinternationalmovementofmoneymetals。IfEnglandhasmorepaymentstomaketoGermanythanGermanytoEngland，thepriceofmarks，expressedinsterling，risesinLondon，andthepriceofsterling，expressedinmarks，fallsinHamburgandBerlin。IfthispreponderanceofEngland’spaymentobligationstowardsGermanyisnotbalancedagain，forinstance，byapreponderanceofpurchasesbyGermanyinEngland，thesterlingpriceofbillsofexchangeinmarksonGermanymustrisetothepointwhereitwillpaytosendmetal(goldcoinorbullion)fromEnglandtoGermanyinpaymentofobligations，insteadofsendingbillsofexchange。Thisisthetypicalcourseofevents。

Ifthisexportofpreciousmetalassumesalargerscopeandlastsforalongerperiod，thentheEnglishbankreserveisaffected，andtheEnglishmoney-market，particularlytheBankofEngland，musttakeprotectivemeasures。

Theseconsistmainly，aswehavealreadyseen，inraisingtheinterestrate。Whenthedrainongoldisconsiderable，themoney-marketasarulebecomestight，thatis，thedemandforloancapitalintheformofmoneysignificantlyexceedsthesupplyandthehigherinterestratefollowsquitenaturallyfromthis；thediscountratefixedbytheBankofEnglandcorrespondstothissituationandassertsitselfonthemarket。Howevertherearecaseswhenthedrainonbullionisduetootherthanordinarycombinationsofbusinesstransactions(forinstance，loanstoforeignstates，investmentofcapitalinforeigncountries，etc。)，andtheLondonmoney-marketassuchdoesnotjustifyaneffectiveriseintheinterestrate；theBankofEnglandmustthenfirst”makemoneyscarce，”asthephrasegoes，throughheavyloansinthe”openmarket”andthusartificiallycreateasituationwhichjustifies，orrendersnecessary，ariseintheinterestrate；suchamanoeuvrebecomesmoredifficultfromyeartoyear——F。E。]

HowthisraisingoftheinterestrateaffectstheratesofexchangeisshownbythefollowingtestimonybeforetheCommitteeoftheLowerHouseconcerningbanklegislationin1857(quotedasB。A。orB。C。1857)。

JohnStuartMill:”2176。Whenthereisastateofcommercialdifficultythereisalways……aconsiderablefallinthepriceofsecurities……foreignerssendovertobuyrailwaysharesinthiscountry，orEnglishholdersofforeignrailwaysharesselltheirforeignrailwaysharesabroad……thereissomuchtransferofbullionprevented。”——”2182。Alargeandrichclassofbankersanddealersinsecurities，throughwhomtheequalisationoftherateofinterestandtheequalisationofcommercialpressurebetweendifferentcountriesusuallytakesplace……arealwaysonthelookouttobuysecuritieswhicharelikelytorise……Theplaceforthemtobuysecuritieswillbethe’countrywhichissendingbullionaway。”——”2184。Theseinvestmentsofcapitaltookplacetoaveryconsiderableextentin1847，toasufficientextenttohaverelievedthedrainconsiderably。”

J。G。Hubbard，ex-Governor，andaDirectoroftheBankofEnglandsince1838:”2545。TherearegreatquantitiesofEuropeansecurities……whichhaveaEuropeancurrencyinallthedifferentmoney-markets，andthosebonds，assoonastheirvalueisreducedby1or2percentinonemarket，areimmediatelypurchasedfortransmissiontothosemarketswheretheirvalueisstillunimpaired。”——”2565。Arenotforeigncountriesconsiderablyindebttothemerchantsofthiscountry？——Verylargely。”——”2566。Therefore，thecashmentofthosedebtsmightbesufficienttoaccountforaverylargeaccumulationofcapitalinthiscountry？——In1847，theultimaterestorationofourpositionwaseffectedbyourstrikingoffsomanymillionspreviouslyduebyAmerica，andsomanymillionsduebyRussiatothiscountry。”[Atthesametime，Englandowedthesesamecountries”soandsomanymillions”

forgrainandalsodidnotfailto”drawaline”throughthegreaterportionofthesemillionsviathebankruptcyoftheEnglishdebtors。SeethereportonBankActs，1857，ChapterXXXabove——F。E。]——”2572。In1847，theexchangebetweenthiscountryandSt。Petersburgwasveryhigh。WhentheGovernmentLettercameoutauthorisingtheBanktoissueirrespectivelyofthelimitationof£；14，000，000[aboveandbeyondthegoldreserve——F。E。]，thestipulationwasthattherateofdiscountshouldbe8%。Atthatmoment，withthethenrateofdiscount，itwasaprofitableoperationtoordergoldtobeshippedfromSt。PetersburgtoLondonandonitsarrivaltolenditat8%uptothematurityofthethreemonths’

billsdrawnagainstthepurchaseofgold。”——”2573。Inallbullionoperationstherearemanypointstobetakenintoconsideration；thereistherateofexchangeandtherateofinterest，whichisavailablefortheinvestmentduringtheperiodofthematurityofthebill[drawnagainstit——F。E。]。”

RATEOFEXCHANGEWITHASIA

Thefollowingpointsareimportantbecause，ontheonehand，theyshowhowEnglandrecoupsitslosseswhenitsrateofexchangewithAsiaisunfavourable，attheexpenseofothercountries，whoseimportsfromAsiaarepaidthroughEnglishmiddlemen。Ontheotherhand，theyareimportantbecauseMr。Wilsononceagainmakesthefoolishattemptheretoidentifytheeffectsoftheexportofpreciousmetalontheratesofexchangewiththeeffectoftheexportofcapitalingeneralupontheserates；theexportbeinginbothcasesnotasameansofpayingorbuying，butforcapitalinvestment。Inthefirstplace，itgoeswithoutsayingthatwhethersomanymillionsofpoundssterlingaresenttoIndiainpreciousmetalorironrails，tobeinvestedinrailwaysthere，thesearemerelytwodifferentformsoftransferringthesameamountofcapitaltoanothercountry；namely，atransferwhichdoesnotenterthecalculationofordinarymercantilebusiness，andforwhichtheexportingcountryexpectsnootherreturnthanthefutureannualrevenuefromtheincomeoftheserailways。Ifthisexportismadeintheformofpreciousmetal，itwillexertadirectinfluenceuponthemoney-marketandwithitupontheinterestrateofthecountryexportingthispreciousmetal；ifnotnecessarilyunderallcircumstances，thenunderthepreviouslyoutlinedconditions，sinceitispreciousmetalandassuchisdirectlyloanablemoney-capitalandthebasisoftheentiremoneysystem。Similarly，thisexportalsodirectlyaffectstherateofexchange。Preciousmetalisexportedonlyforthereason，andtotheextent，thatbillsofexchange，sayonIndia，whichareofferedintheLondonmoney-market，donotsufficetomaketheseextraremittances。Inotherwords，thereisademandforIndianbillsofexchangewhichexceedstheirsupply，andsotheratesturnforatimeagainstEngland，notbecauseitisindebttoIndia，butbecauseithastosendextraordinarysumstoIndia。Inthelongrun，suchashipmentofpreciousmetaltoIndiamusthavetheeffectofincreasingtheIndiandemandforEnglishcommodities，becauseitindirectlyincreasestheconsumingpowerofIndiaforEuropeangoods。But。ifthecapitalisshippedintheformofrails，etc。，itcannothaveanyinfluenceontheratesofexchange，sinceIndiahasnoreturnpaymenttomakeforit。Preciselyforthisreason，itneednothaveanyinfluenceonthemoney-market。Wilsonseekstoestablishtheexistenceofsuchaninfluencebydeclaringthatsuchanextraexpenditurewouldbringaboutanadditionaldemandformoneyaccommodationandwouldthusinfluencetheinterestrate。Thismaybethecase；buttomaintainthatitmusttakeplaceunderallcircumstancesistotallywrong。NomatterwheretherailsareshippedandwhetherlaidonEnglishorIndiansoil，theyrepresentnothingbutadefiniteexpansionofEnglishproductioninaparticularsphere。Tocontendthatanexpansionofproduction，evenwithinverybroadlimits，cannottakeplacewithoutdrivinguptheinterestrate，isabsurd。Moneyaccommodation，i。e。，theamountofbusinesstransactedwhichincludescreditoperations，maygrow；butthesecreditoperationscanincreasewhiletheinterestrateremainsunchanged。ThiswasactuallythecaseduringtherailwaymaniainEnglandintheforties。Theinterestratedidnotrise。Anditisevidentthat，sofarasactualcapitalisconcerned，inthiscasecommodities，theeffectonthemoney-marketwillhejustthesame，whetherthesecommoditiesaredestinedforforeigncountriesorfordomesticconsumption。ItcouldonlymakeadifferencewhencapitalinvestmentsbyEnglandinforeigncountriesexertedarestraininginfluenceuponitscommercialexports，i。e。，exportsforwhichpaymentmusthemade，thusgivingrisetoareturnflow，ortotheextentthatthesecapitalinvestmentsarealreadygeneralsymptomsindicatingtheover-expansionofcreditandtheinitiationofswindlingoperations。

Inthefollowing，WilsonputsthequestionsandNewmarchreplies。”1786。Onaformerdayyoustated，withreferencetothedemandforsilverfortheEast，thatyoubelievedthattheexchangeswithInhawereinfavourofthiscountry，notwithstandingthelargeamountofbullionthatiscontinuallytransmittedtotheEast；haveyouanygroundforsupposingtheexchangestobeinfavourofthiscountry？——Yes，Ihave……IfindthattherealvalueoftheexportsfromtheUnitedKingdomtoIndiain1851was£；7，420，000；tothatistobeaddedtheamountofIndiaHousedrafts，thatis，thefundsdrawnfromIndiabytheEastIndiaCompanyforthepurposeoftheirownexpenditure。Thosedraftsinthatyearamountedto£；3，200，000，making，therefore，thetotalexportfromtheUnitedKingdomtoIndia£；10，620，000。In1855……theactualvalueoftheexportofgoodsfromtheUnitedKingdomhadrisento£；10，350，000

andtheIndiaHousedraftswere£；3，700，000，making，therefore，thetotalexportfromthiscountry£；14，050，000。Nowasregards1851，IbelievetherearenomeansofstatingwhatwastherealvalueoftheimportofgoodsfromIndiatothiscountry，butin1854and1855wehaveastatementoftherealvalue；in1855，thetotalrealvalueoftheimportsofgoodsfromIndiatothiscountrywas£；12，670，000andthatsum，comparedwiththe£；14，050，000Ihavementioned，leftabalanceinfavouroftheUnitedKingdom，asregardsthedirecttradebetweenthetwocountries，of£；1，380，000”[B。A。1857]。

ThereuponWilsonremarksthattheratesofexchangearealsoaffectedbyindirectcommerce。Forinstance，exportsfromIndiatoAustraliaandNorthAmericaarecoveredbydraftsonLondon，andthereforeaffecttherateofexchangejustasthoughthecommoditieshadgonedirectlyfromIndiatoEngland。Furthermore，whenIndiaandChinaareconsideredtogether，thebalanceisagainstEngland，sinceChinahasconstantlytomakeheavypaymentstoIndiaforopium，andEnglandhastomakepaymentstoChina，sothatthesumsgobythiscircuitousroutetoIndia(1787，1788)。

1791。Wilsonnowasksiftheeffectontheratesofexchangewillnotbethesamewhethercapital”wentintheformofironrailsandlocomotives，orwhetheritwentintheformofcoin。”Newmarchcorrectlyanswers:The£；12millionwhichhavebeensentduringthelastfewyearstoIndiaforrailwayconstructionservedtopurchaseanannuitywhichIndiahastopayatregularintervalstoEngland。”Butasfarasregardstheimmediateoperationonthebullionmarket，theinvestmentsofthe£；12millionwouldonlybeoperativeasfarasbullionwasrequiredtobesentoutforactualmoneydisbursements。”

1797。[Weguelinasks:)”Ifnoreturnismadeforthisiron(rails)，howcanitbesaidtoaffecttheexchanges？——Idonotthinkthatthatpartoftheexpenditurewhichissentoutintheformofcommoditiesaffectsthecomputationoftheexchange……Thecomputationoftheexchangebetweentwocountriesisaffected，onemightsay，solelybythequantityofobligationsorbillsofferinginonecountry，ascomparedwiththequantityofferingintheothercountryagainstit；thatistherationaleoftheexchange。

Now，asregardsthetransmissionofthose£；12，000，000，themoneyinthefirstplaceissubscribedinthiscountry……now，ifthenatureofthetransactionwassuchthatthewholeofthat£；12，000，000wasrequiredtobelaiddowninCalcutta，Bombay，andMadrasintreasure……

asuddendemandwouldveryviolentlyoperateuponthepriceofsilver，andupontheexchange，justthesameasiftheIndiaCompanyweretogivenoticetomorrowthattheirdraftsweretoberaisedfrom£；3，000，000

to£；12，000，000。Buthalfofthose£；12，000，000isspent……inbuyingcommoditiesinthiscountry……ironrailsandtimber，andothermaterialsitisanexpenditureinthiscountryofthecapitalofthiscountryforaparticularkindofcommoditytobesentouttoIndia，andthereisanendofit。”——”1798。[Weguelin:]Buttheproductionofthosearticlesofironandtimbernecessaryfortherailwaysproducesalargeconsumptionofforeignarticles，whichmightaffecttheexchange？——Certainly。”

Wilsonnowthinksthatironrepresentslabourtoalargeextent，andthatthewagepaidforthislabourlargelyrepresentsimportedgoods(1799)，andthenquestionsfurther:”1801。Butspeakingquitegenerally，itwouldhavetheeffectofturningtheexchangesagainstthiscountryifyousentabroadthearticleswhichwereproducedbytheconsumptionoftheimportedarticleswithoutreceivinganyremittanceforthemeitherintheshapeofproduceorotherwise？——

Thatprincipleisexactlywhattookplaceinthiscountryduringthetimeofthegreatrailwayexpenditure[1845]。Forthreeorfourorfiveyears，youspentuponrailways£；30，000，000，nearlythewholeofwhichwentinthepaymentofwages。Yousustainedinthreeyearsalargerpopulationemployedinconstructingrailways，andlocomotives，andcarriages，andstationsthanyouemployedinthewholeofthefactorydistricts。Thepeople……

spentthosewagesinbuyingteaandsugarandspiritsandotherforeigncommodities；thosecommoditieswereimported；butitwasafact，thatduringthetimethisgreatexpenditurewasgoingontheforeignexchangesbetweenthiscountryandothercountrieswerenotmateriallyderanged。Therewasnoeffluxofbullion，onthecontrary，therewasratheraninflux。”

1802。WilsoninsiststhatwithanequalisedtradebalanceandparratesbetweenEnglandandIndiatheextrashipmentofironandlocomotives”wouldaffecttheexchangeswithIndia。”Newmarchcannotseeitthatwaysolongastherailsaresentoutascapitalinvestmentand’Indiahasnopaymenttomakefortheminoneformoranother；headds:”Iagreewiththeprinciplethatnoonecountrycanhavepermanentlyagainstitselfanadversestateofexchangewithalltheothercountries，withwhichitdeals；anadverseexchangewithonecountrynecessarilyproducesafavourableexchangewithanother。”——Wilsonretortswiththistriviality:”1803。Butwouldnotatransferofcapitalbethesamewhetheritwassentinoneformoranother？——

Asregardstheobligationitwould。”——”1804。TheeffectthereforeofmakingrailwaysinIndia，whetheryousendbullionorwhetheryousendmaterials，wouldbethesameuponthecapital-markethereinincreasingthevalueofcapitalasifthewholewassentoutinbullion？

Ifironpricesdidnotrise，itwasinanycaseproofthatthe”value”

of”capital”containedintherailshadnotbeenincreased。Whatwearehereconcernedwithisthevalueofmoney-capital，i。e。，theinterestrate。Wilsonwouldliketoidentifymoney-capitalwithcapitalingeneral。

Thesimplefactisessentiallythat12millionweresubscribedinEnglandforIndianrailways。Thisisamatterwhichhasnothingdirectlytodowiththeratesofexchange，andthedesignationofthe£；12millionisalsothesametothemoney-market。Ifthemoney-marketisingoodshape。

itneednotproduceanyeffectatallonit，justastheEnglishrailwaysubscriptionsin1844and1845leftthemoney-marketunaffected。Ifthemoney-marketisalreadyinsomewhatdifficultstraits，theinterestratemightindeedbeaffectedbyit，butcertainlyonlyinanupwarddirection，andthis，accordingtoWilson’stheory，wouldfavourablyaffecttheratesofexchangeforEngland，thatis，itwouldworkagainstthetendencytoexportpreciousmetal；ifnottoIndia，thentosomeothercountry。Mr。

Wilsonjumpsfromonethingtoanother。InQuestion1802itistheratesofexchangethataresupposedtobeaffected，andinQuestion1804the”valueofcapital”——whicharetwoverydifferentthings。Theinterestratemayaffecttheratesofexchange，andtheratesofexchangemayaffecttheinterestrate，butthelattercanbestablewhiletheratesofexchangefluctuate，andtheratesofexchangecanbestablewhiletheinterestratefluctuates。Wilsoncannotgetitthroughhisheadthatthemereforminwhichcapitalisshippedabroadmakessuchadifferenceintheeffect，i。e。，thatthedifferenceintheformofcapitalisofsuchimportance，andparticularlyitsmoney-form，whichrunsverymuchcountertoenlightenedeconomy。NewmarchrepliestoWilsonone-sidedlyinthathedoesnotindicatethathehasjumpedsosuddenlyandwithoutreasonfromrateofexchangetointerestrate。NewmarchanswersQuestion1804withuncertaintyandequivocation:”Nodoubt，ifthereisademandfor£；12，000，000toberaised，itisimmaterial，asregardsthegeneralrateofinterest，whetherthat£；12

millionisrequiredtobesentinbullionorinmaterials。Ithink，however”

[afinetransition，this”however”，whenheintendstosaytheexactopposite]”itisnotquiteimmaterial”[itisimmaterial，but，nevertheless，itisnotimmaterial]”becauseintheonecasethe£；6millionwouldbereturnedimmediately；intheothercaseitwouldnotbereturnedsorapidly。

Thereforeitwouldmakesome”[whatdefiniteness！]”difference，whetherthe£；6millionwasexpendedinthiscountryorsentwhollyoutofit。”Whatdoeshemeanwhenhesayssixmillionwouldreturnimmediately？

Insofarasthe£；6millionhavebeenexpendedinEngland，theyexistinrails，locomotives，etc。，whichareshippedtoIndia，whencetheydonotreturn；theirvaluereturnsveryslowlythroughamortisation，whereasthesixmillioninpreciousmetalmayperhapsreturnveryquicklyinkind。

Insofarasthesixmillionhavebeenexpendedinwages，theyhavebeenconsumed；butthemoneyusedforpaymentcirculatesinthecountrythesameasever，orformsareserve。Thesameholdstruefortheprofitsofrailproducersandthatportionofthesixmillionwhichreplacestheirconstantcapital。Thus，thisambiguousstatementaboutreturnsisusedbyNewmarchonlytoavoidsayingdirectly:Themoneyhasremainedinthecountry，andinsofarasitservesasloanablemoney-capitalthedifferenceforthemoney-market(asidefromthepossibilitythatcirculationcouldhaveabsorbedmorecoin)isonlythatitischargedtotheaccountofA

insteadofB。Aninvestmentofthiskind，wherecapitalistransferredtoothercountriesincommodities，notinpreciousmetal，canaffecttherateofexchange(butnottherateofexchangewiththecountryinwhichtheexportedcapitalisinvested)onlyinsofarastheproductionoftheseexportedcommoditiesrequiresanadditionalimportofotherforeigncommodities。

Thisproductionthencannotbalanceouttheadditionalimport。However，thesamethinghappenswitheveryexportoncredit，nomatterwhetherintendedforcapitalinvestmentorordinarycommercialpurposes。Moreover，thisadditionalimportcanalsocallforthbywayofreactionanadditionaldemandforEnglishgoods，forinstance，onthepartofthecoloniesortheUnitedStates。

Previously(1786)，Newmarchstatedthat，owingtodraftsoftheEastIndiaCompany，exportsfromEnglandtoIndiawerelargerthanimports。

SirCharlesWoodcross-examineshimonthisscore。ThispreponderanceofEnglishexportstoIndiaoverimportsfromIndiaisactuallybroughtaboutbyimportsfromIndiaforwhichEnglanddoesnotpayanyequivalent。ThedraftsoftheEastIndiaCompany(nowtheEastIndiagovernment)reservethemselvesintoatributeleviedonIndia。Forinstance，in1855，importsfromIndiatoEnglandamountedto£；12，670，000；EnglishexportstoIndiaamountedto£；10，350，000；balanceinIndia’sfavour£；2，250，000。

[i。e。approximately21/4million:moreprecisely，£；2，320，000——Ed。]”Ifthatwasthewholestateofthecase，that£；2，250，000wouldhavetoberemittedinsomeformtoIndia。

ButthencomeintheadvertisementsfromtheIndiaHouse。TheIndiaHouseadvertisetothiseffectthattheyarepreparedtograntdraftsonthevariouspresidenciesinIndiatotheextentof£；3，250，000。[ThisamountwasleviedfortheLondonexpensesoftheEastIndiaCompanyandforthedividendstobepaidtostockholders。]Andthatnotmerelyliquidatesthe£；2，250，000whicharoseoutofthecourseoftrade，butitpresents£；1，000，000ofsurplus”(1917)[B。A。1857]。”1922。[Wood:]ThentheeffectofthoseIndiaHousedraftsisnottoincreasetheexportstoIndia，butprotantotodiminishthem？”

[Thisshouldread:toreducethenecessityofcoveringtheimportsfromIndiabyexportstothatcountrytothesameamount。]Mr。NewmarchexplainsthisbysayingthattheBritishimport”goodgovernment”intoIndiaforthese£；3，700，000(1925)。Wood，asaformerMinisterforIndia，knowsfullwellthekindof”goodgovernment”whichtheBritishimporttoIndia，andcorrectlyreplieswithirony:”1926。Thentheexport，which，youstate，iscausedbytheEastIndiadrafts，isanexportofgoodgovernment，andnotofproduce。”——SinceEnglandexportsagooddeal”inthisway”for”goodgovernment”andascapitalinvestmentinforeigncountries——thusobtainingimportswhicharecompletelyindependentoftheordinaryrunofbusiness，tributepartlyforexported”goodgovernment”andpartlyintheformofrevenuesfromcapitalinvestedinthecoloniesorelsewhere，i。e。，tributeforwhichitdoesnothavetopayanyequivalent——

itisevidentthattheratesofexchangearenotaffectedwhenEnglandsimplyconsumesthistributewithoutexportinganythinginreturn。Hence，itisalsoevidentthattheratesofexchangearenotaffectedwhenitreinveststhistribute，notinEngland，butproductivelyorunproductivelyinforeigncountries；forinstance，whenitsendsmunitionsforittotheCrimea。Moreover，totheextentthatimportsfromabroadenterintotherevenueofEngland——ofcourse，theymustbepaidforintheformoftribute，forwhichnoequivalentreturnisnecessary，orbyexchangeforthisunpaidtributeorintheordinarycourseofcommerce——Englandcaneitherconsumethemorreinvestthemascapital。Inneithercasearetheratesofexchangeaffected，andthisisoverlookedbythesageWilson。Whetheradomesticoraforeignproductconstitutesapartoftherevenue——wherebythelattercasemerelyrequiresanexchangeofdomesticforforeignproducts——theconsumptionofthisrevenue，beitproductiveorunproductive，altersnothingintheratesofexchange，eventhoughitmayalterthescaleofproduction。

Thefollowingshouldbereadwiththeforegoinginmind:

1934。WoodasksNewmarchhowtheshipmentofwarsuppliestotheCrimeawouldaffecttherateofexchangewithTurkey。Newmarchreplies:”Idonotseethatthemeretransmissionofwarlikestoreswouldnecessarilyaffecttheexchange，butcertainlythetransmissionoftreasurewouldaffecttheexchange。”Inthiscasehethusdistinguishescapitalintheformofmoneyfromcapitalinotherforms。ButnowWilsonasks:”1935。Ifyoumakeanexportofanyarticletoagreatextent，forwhichthereistobenocorrespondingimport”[Mr。WilsonforgetsthatthereareveryconsiderableimportsintoEnglandforwhichcorrespondingexportshavenevertakenplace，exceptintheformof”goodgovernment”orofpreviouslyexportedinvestmentcapital；inanycaseimportswhichdonotenterintonormalcommercialmovement。Buttheseimportsareagainexchanged，forinstance，forAmericanproducts，andthecircumstancethatAmericangoodsareexportedwithoutcorrespondingimportsdoesnotalterthefactthatthevalueoftheseimportscanbeconsumedwithoutanequivalentflowabroad；

theyhavebeenreceivedwithoutreciprocalexportsandcanthereforebeconsumedwithoutenteringintothebalanceoftrade]，”youdonotdischargetheforeigndebtyouhavecreatedbyyourimports”[but，ifyouhavepreviouslypaidfortheseimports，forinstance，bycreditgivenabroad，thennodebtiscontractedthereby，andthequestionhasnothingtodowiththeinternationalbalance；itresolvesitselfintoproductiveandunproductiveexpenditures，nomatterwhethertheproductssoconsumedaredomesticorforeign]，”andthereforeyoumustbythattransactionaffecttheexchangesbynotdischargingtheforeigndebt，byreasonofyourexporthavingnocorrespondingimports？——

Thatistrueasregardscountriesgenerally。”

ThislecturebyWilsonamountstosayingthateveryexportwithnocorrespondingimportissimultaneouslyanimportwithnocorrespondingexport，becauseforeign，i。e。，imported，commoditiesenterintotheproductionoftheexportedarticle。Theassumptionisthateveryexportofthiskindisbasedon，orcreates，anunpaidimportandthuspresupposesadebtabroad。

Thisiswrong，evenwhenthefollowingtwocircumstancesaredisregarded:

1)Englandreceivescertainimportsfreeofchargeforwhichitpaysnoequivalent，e。g。，aportionofitsIndianimports。ItcanexchangetheseforAmericanimportsandexportthelatterwithoutimportinginreturn；

inanycase，sofarasthevalueisconcerned，ithasonlyexportedsomethingthathascostitnothing。2)Englandmayhavepaidforimports，forinstance，Americanimports，whichconstituteadditionalcapital；ifitconsumestheseunproductively，forinstance，aswarmaterials，thisdoesnotconstituteanydebttowardsAmericaanddoesnotaffecttherateofexchangewithAmerica。NewmarchcontradictshimselfinNos。1934and1935，andWoodcallsthistohisattentioninNo。1938:”Ifnoportionofthegoodswhichareemployedinthemanufactureofthearticlesexportedwithoutreturn[warmaterials]，camefromthecountrytowhichthosearticlesaresent，howistheexchangewiththatcountryaffected；supposingthetradewithTurkeytobeinanordinarystateofequilibrium，howistheexchangebetweenthiscountryandTurkeyaffectedbytheexportofwarlikestorestotheCrimea？”——HereNewmarchloseshisequanimity；heforgetsthathehasansweredthesamesimplequestioncorrectlyinNo。1934，andsays:”Weseem，Ithink，tohaveexhaustedthepracticalquestion，andtohavenowattainedaveryelevatedregionofmetaphysicaldiscussion。”

[Wilsonhasstillanotherversionofhisclaimthattherateofexchangeisaffectedbyeverytransferofcapitalfromonecountrytoanother，nomatterwhetherintheformofpreciousmetalorcommodities。Wilsonknows，ofcourse，thattherateofexchangeisaffectedbytheinterestrate，particularlybytherelationoftheratesofinterestprevailinginthetwocountrieswhosemutualratesofexchangeareunderdiscussion。Ifhecannowdemonstratethatsurplusesofcapitalingeneral，i。e。，inthefirstplace，commoditiesofallkindsincludingpreciousmetal，haveahandininfluencingtheinterestrate，thenheisastepclosertohisgoal；atransferofanyconsiderableportionofthiscapitaltosomeothercountrymustthenchangetheinterestrateinbothcountries，withthechangetakingplaceinoppositedirections。Thereby，inasecondaryway，therateofexchangebetweenbothcountriesisalsoaltered——F。

E。]

HethensaysintheEconomist，May22，1847，page574，whichheeditedatthetime:”……Nodoubt，however，suchabundanceofcapitalasisindicatedbylargestocksofcommoditiesofallkinds，includingbullion，wouldnecessarilylead，notonlytolowpricesofcommoditiesingeneral，butalsotoalowerrateofinterestfortheuseofcapital。Ifwehaveastockofcommoditiesonhand，whichissufficienttoservethecountryfortwoyearstocome，acommandoverthosecommoditieswouldbeobtainedforagivenperiod，atamuchlowerratethanifthestockswerebarelysufficienttolastustwomonths。Allloansofmoney，inwhatevershapetheyaremade，aresimplyatransferofacommandovercommoditiesfromonetoanother。Whenever，therefore，commoditiesareabundant，theinterestofmoneymustbelow，andwhentheyarescarce，theinterestofmoneymustbehigh。Ascommoditiesbecomeabundant，thenumberofsellers，inproportiontothenumberofbuyers，increases，and，inproportionasthequantityismorethanisrequiredforimmediateconsumption，somustalargerportionbekeptforfutureuse。Underthesecircumstances，thetermsonwhichaholderbecomeswillingtosellforafuturepayment，oroncredit，becomelowerthanifhewerecertainthathiswholestockwouldberequiredwithinafewweeks”。

Inregardtostatement，itistobenotedthatalargeinfluxinpreciousmetalcantakeplacesimultaneouslywithacontractioninproduction，asisalwaysthecaseintheperiodfollowingacrisis。Inthesubsequentphase，preciousmetalmaycomeinfromcountrieswhichmainlyproducepreciousmetal；importsofothercommoditiesaregenerallybalancedbyexportsduringthisperiod。Inthesetwophases，theinterestrateislowandrisesbutslowly；wehavealreadydiscussedthereasonforthis。

Thislowinterestratecouldalwaysbeexplainedwithoutrecoursetotheinfluenceofany”largestocksofcommoditiesofallkinds。”Andhowisthisinfluencetotakeplace？Thelowpriceofcotton，forinstance，renderspossiblethehighprofitsofthespinners，etc。Nowwhyistheinterestratelow？Surelynotbecausetheprofit，whichmaybemadeonborrowedcapital，ishigh。Butsimplyandsolelybecause，underexistingconditions，thedemandforloancapitaldoesnotgrowinproportiontothisprofit；

inotherwords，becauseloancapitalhasamovementdifferentfromindustrialcapital。WhattheEconomistwantstoproveisexactlythereverse，namely，thatthemovementsofloancapitalareidenticalwiththoseofindustrialcapital。

Inregardtostatement，ifwereducetheabsurdassumptionofstocksfortwoyearsinadvancetothepointwhereitbeginstotakeonsomemeaning，itsignifiesthatthemarketisoverstocked。Thiswouldcauseafallinprices。Lesswouldhavetobepaidforabaleofcotton。Thiswouldbynomeansjustifytheconclusionthatmoneyforthepurchaseofthiscottonismoreeasilyborrowed。Thisdependsonthestateofthemoney-market。

Ifmoneycanbeborrowedmoreeasily，itisonlybecausecommercialcreditisinastaterequiringittomakelessusethanusualofbankcredit。

Thecommoditiesgluttingthemarketareeithermeansofsubsistenceormeansofproduction。Thelowpriceofbothincreasestheindustrialcapitalist’sprofit。Whyshoulditdepresstheinterestrate，unlessitbethroughtheantithesis，ratherthantheidentity，betweentheabundanceofindustrialcapitalandthedemandformoneyaccommodation？Circumstancesaresuchthatthemerchantandindustrialcapitalistcanmoreeasilyadvancecredittooneanother；owingtothisfacilitationofcommercialcredit，bothindustrialistaswellasmerchantneedlessbankcredit；hencetheinterestratecanbelow。Thislowinterestratehasnothingtodowiththeinfluxinpreciousmetal，althoughbothmayrunparalleltoeachother，andthesamecausesbringingaboutlowpricesofimportedarticlesmayalsoproduceasurplusofimportedpreciousmetal。Iftheimportmarketwerereallyglutted，itwouldprovethatadecreaseinthedemandforimportedarticleshadtakenplace，andthiswouldbeinexplicableatlowprices，unlessitwereattributedtoacontractionofdomesticindustrialproduction；butthis，again，wouldbeinexplicable，solongasthereisexcessiveimportingatlowprices。

Amassofabsurdities-inordertoprovethatafallinprices=afallintheinterestrate。Bothmaysimultaneouslyexistsidebyside。Butiftheydo，itwillbeareflectionoftheoppositioninthedirectionsofthemovementofindustrialcapitalandthemovementofloanablemoney-capital。

Itwillnotbeareflectionoftheiridentity。

Inregardtostatement，itishardtounderstandevenafterthisexpositionwhymoneyinterestshouldbelowwhencommoditiesareavailableinabundance。

Ifcommoditiesarecheap，thenImayneedonly£；1，000insteadoftheprevious£；2，000tobuyadefinitequantity。ButperhapsIneverthelessinvest£；2，000，andthusbuytwicethequantitywhichIcouldhaveboughtformerly。Inthisway，Iexpandmybusinessbyadvancingthesamecapital，whichImayhavetoborrow。Ibuy£；2，000worthofcommodities，thesameasbefore。Mydemandonthemoney-marketthereforeremainsthesame，eventhoughmydemandonthecommodity-marketriseswiththefallincommodity-prices。Butifthisdemandforcommoditiesshoulddecrease，thatis，ifproductionshouldnotexpandwiththefallincommodity-prices，aneventwhichwouldcontradictallthelawsoftheEconomist，thenthedemandforloanablemoney-capitalwoulddecrease，althoughtheprofitwouldincrease。Butthisincreasingprofitwouldcreateademandforloancapital。Incidentally，alowlevelofcommodity-pricesmaybeduetothreecauses。First，tolackofdemand。Insuchacase，theinterestrateislowbecauseproductionisparalysedandnotbecausecommoditiesarecheap，forthelowpricesarebutarejectionofthatparalysis。Second，itmaybeduetosupplyexceedingdemand。Thismaybetheresultofaglutonthemarket，etc。，whichmayleadtoacrisisandcoincidewithahighinterestrateduringthecrisisitself；or，itmaybetheresultofafallinthevalueofcommodities，sothatthesamedemandcanbesatisfiedatlowerprices。Whyshouldtheinterestratefallinthelastcase？Becauseprofitsincrease？Ifthiswereduetolessmoney-capitalbeingrequiredforobtainingthesameproductiveorcommodity-capital，itwouldmerelyprovethatprofitandinterestareinverselyproportionaltoeachother。Inanycase，thegeneralstatementoftheEconomistisfalse。Lowmoney-pricesforcommoditiesandalowinterestratedonotnecessarilygotogether。Otherwise，theinterestratewouldbelowestinthepoorestcountries，wheremoney-pricesforproducearelowest，andhighestintherichestcountries，wheremoney-pricesforagriculturalproductsarehighest。Ingeneral，theEconomistadmits:

Ifthevalueofmoneyfalls，itexertsnoinfluenceontheinterestrate。

£；100bring£；105thesameasever。Ifthe£；100areworthless，soarethe£；5interest。Thisrelationisnotaffectedbytheappreciationordepreciationoftheoriginalsum。Consideredfromthepointofviewofvalue，adefinitequantityofcommoditiesisequaltoadefinitesumofmoney。Ifthisvalueincreases，itisequaltoalargersumofmoney。